Huge insurance claims from the Chilean earthquake and the BP oil spill have halved profits at the Lloyd's of London market, with payouts expected to hit their highest level for at least five years.

The world's oldest insurance market said net claims jumped by more than a fifth to £5.4bn in the first half of the year.

Net incurred claims – an estimate of the eventual payouts arising from events in a given period – rose by 21% as Lloyd's calculated that the earthquake in Chile would cost its syndicate members $1.4bn (£885m) in insurance payouts.

Estimated estimated that the Deepwater Horizon rig explosion would add a further $300m-$600m to its members' claims bill, while the US snowstorms and the Xynthia windstorm in Europe expected to cost about $50m and $25m respectively.

Nick Pope, an analyst with Jefferies & Co in London, said there could be worse to come: "The first half of 2010 was a unique period for Lloyd's, with these two very large losses at that time of the year. The catastrophe season tends to run from the end of August to the middle of November and is dominated by hurricanes and tropical storms in the Gulf of Mexico. There has been nothing serious so far on that front."

Lloyd's traces its origins back 322 years to Edward Lloyd's coffee house in London where wealthy merchants insured ships. There are 85 syndicates underwriting insurance at Lloyd's, covering all classes of business from more than 200 countries worldwide

The cluster of competing syndicates specialise in covering large-scale risks such as catastrophes, which account for more than a third of its business. It is the best barometer of the insurance market for natural disasters in the world. Amlin, Hiscox and Catlin are among its best known members.

Richard Ward, Lloyd's chief executive, said: "The last time the insurance industry saw claims of this magnitude was back in 1994 with the Northridge earthquake in California."

Ward added that the claims incurred in the first half would involve payouts over several years but had been booked in the first half in line with the industry policy of accounting for them straight away.

Natural disasters

Ward couldn't say if Lloyd's first-half incurred claims total of £5.4bn represented a record level of claims for a six-month period, since it only began reporting interim figures in 2005.

According to reinsurance group Munich Re the insurance industry will eventually have to pay out an estimated $22bn of worldwide claims relating to natural disasters in the first half of the year – double the average over the past 10 years.

The increase in insurance claims pushed Lloyd's pre-tax profit down by 53% to £628m in the six months to the end of June, its lowest level since the syndicates began announcing interim results in 2005.

The group's so-called underwriting result – the difference between premiums and incurred claims – recorded a six-fold decline, from £678m to £107m, as a result of the rise in catastrophes. This is also the highest figure since Lloyds began reporting interim figures.

Lloyd's bottom line was also hurt in the first half by a 15% drop in profits from its investments to £597m. The syndicates' investment profits fell as cash from retained profits and premiums were switched into safer assets with lower yields.

Like its competitors, Lloyd's has been hit by declining premiums amid intense competition between insurers who are holding large quantities of capital after a relatively low volume of insurance claims and a rebound in investment markets in 2009.

The syndicates expect premiums to remain depressed for the rest of this year and to remain flat – or even record "low single-digit" percentage declines – in 2011.

Downward pressure

Ward said: "In the absence of a significant reallocation of capital, rates will continue to suffer because there is a lot of downward pressure," adding that a $50bn and $80bn depletion of the global insurance industry's combined cash reserves was needed to ease the pressure.

Lloyd's announced its results after Munich Re, the world's biggest reinsurer, said in August that it may have to re-evaluate the risk of large scale projects following the BP oil rig explosion, which killed 11 people, spilled an estimated 4.9m barrels of oil into the Gulf of Mexico and has become the world's largest accidental oil leak. Munich said it was very difficult to estimate its liabilities in such a hugely complex project, where the oil rigs operated at great depths.